Indonesia: Effects on markets of the COVID-19 outbreak – UOB

Economist at UOB Group Enrico Tanuwidjaja reviewed the implications of the coronavirus outbreak on the Indonesian markets.

Key Quotes

“Indonesia’s financial assets, in particular its sovereign bond market has had a remarkable run in 2019, recording a full-year inflows of close to USD12bn (this is comparable to strong inflows in 2014 and 2017). A combination of rate cuts, stable inflation, and relatively attractive yield differences between Indonesian and two other safe-haven sovereign bonds (the German Bunds and US Treasuries) have continued to attract global inflows into the Indonesian bond market.”

“Historical precedence suggests that Indonesian bond market and the rupiah were hardly moved or affected negatively during viral outbreak episodes such as during the 2003’s SARS (severe acute respiratory syndrome) and the 2012’s MERS (Middle-Eastern respiratory syndrome). Instead, we think that Indonesian assets and the rupiah are more outflows sensitive to financial market shocks such as the 2013’s Fed Taper Tantrum and 2015’s CNY devaluation. This suggests that given the shallowness of the Indonesian financial markets, we are more prone and very sensitive to financial shocks compared to other type of shocks, such as the virus outbreak shock.”

“We are of the view that given the measured pace of narrowing in the current account deficit (CAD), the recent strong inflows coupled with stellar appreciation of the IDR might not be sustainable.”

“The best illustration to explain the current situation is that Indonesian assets are experiencing a very intense tug-of-war between the enticing yield differentials that encourage continued inflows and the underlying CAD position that necessitates gradual depreciation of IDR and more measured inflows into the asset markets – with the former winning at the moment.”

“Going further into 2020, we are of the view a more expansionary fiscal policy to support growth recovery, inflation risks amidst higher administrative prices, and potentially a pause in Bank Indonesia’s rate cutting cycle, bond assets and the rupiah are likely to consolidate lower from the recent stellar rally. Should the containment of the 2019-nCoV be speedier than expected, we could probably expect the global growth recovery to resume in 2020 and would support a case more for a more pronounced equity market rally.”


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